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Alaska and a trio of oil companies that want to develop the state's North Slope natural gas reserves have agreed on the "fiscal certainty" portion of a controversial draft contract for a $20 billion natural gas pipeline. Lawmakers, who have been reviewing the draft pipeline contract, now have a version that includes fiscal terms.

And those terms, which include a rewrite of Alaska production taxes to 20% on profits may not be to the liking of state lawmakers. Democrats and Republicans have haggled over what the rate should be, but both have supported rates higher than 20%.

Alaska Gov. Frank Murkowski has now put the issue squarely in the court of the legislature, and some viewed his press conference last week to announce the "completion" of his contract as a means of pressuring lawmakers for action on his preferred plan.

"This puts into contract form the agreement we reached with the producers' CEOs last February," Murkowski said. "At that time, we announced the completion of the gas pipeline portion of the draft contract, as well as their agreement to pay a new net profits severance tax rate of 20% to replace the ELF [economic limit factor, an adjustment that offers tax breaks for smaller oilfields]. Completion of the oil fiscal certainty portion of the contract formalizes that agreement."

Murkowski proposed legislation late last year to overhaul the state's system for taxing oilfield profits (see NGI, Nov. 7, 2005). He has claimed that the tax overhaul is necessary to encourage producers ConocoPhillips, BP, and Exxon Mobil to move forward with the Alaska Natural Gas Pipeline and has sought to roll the new tax terms into the draft pipeline contract with the producers. Alaska lawmakers, who have been in special session to review the gas contract, failed to agree on new tax rates during the recently ended regular session. They recently returned to consideration of the new oil tax (see NGI, May 22).

The oil fiscal certainty portion of the contract adds another 100 pages to an already lengthy document, which now runs more than 1,000 pages with associated documents. The contract is not an agreement to build a gas pipeline; however, it sets out terms for construction and operation should the oil companies decide to go ahead with the project to move North Slope gas as far as Chicago. Among other things, the contract includes a provision that would give the state a 20% ownership interest in the pipeline. The state also would collect royalties in-kind and would then be required to market the gas collected.

"We have plugged in our 20% number for the tax rate, which we know the industry has accepted," Murkowski said. The governor's "20-20" plan would tax producers 20% on their Alaska oil profits and give them a 20% credit on what they spend to find and develop new supplies in the state.

During last Wednesday's press conference, Murkowski and executives from the three oil companies touted the agreement. "This fiscal contract provides the predictable and durable terms that are necessary to advance the gas pipeline project to the next phase," said Richard Owen, vice president of Exxon Mobil Alaska Production Inc.

Last week Senate lawmakers voted 15-4 to rewrite the state's production taxes on oil and natural gas. It was the second time this year that the Senate has approved a rewrite. The Senate rewrite of Alaska's production tax would replace the current system with a 22.5% tax on the profits oil companies derive from their Alaska operations. (The House previously approved a 21.5% tax.) Companies also would receive a 20% tax credit on capital investment they make in the state. The tax provision includes an escalator that would raise the tax by 0.1% for every dollar per barrel when the price of oil rises above $35 minus companies' costs. When costs are $15 per barrel, the escalator would start when oil passes $50/bbl, for example.

The tax is intended to raise Alaska's revenues when oil prices are high. At current oil prices, state economists have estimated that Alaska would collect about $1.2 billion more next year under the new tax plan than it would under the current tax structure.

The Senate previously passed a tax rewrite with a 22.5% rate; the House, 21.5%. Murkowski repeated last Wednesday that 22.5% is too high to encourage the development of the gas pipeline. He called for lawmakers to go ahead and approve the 20-20 terms. The governor and executives from the three oil companies would not go so far as to say that rejection of the 20-20 tax would be a deal-breaker for the gas pipeline agreement, but there were hints in that direction.

"I would urge the legislature to pass the PPT [petroleum production tax] as soon as possible with the 20-20 that I worked out with the producers some time ago," Murkowski said.

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Natural Gas Intelligence (NGI), is a leading provider of natural gas, shale news and market information for the deregulated North American natural gas industry. Since the first issue of Natural Gas Intelligence was published in 1981, NGI has provided key pricing and data relied upon daily by thousands of industry participants in the U.S, Canada and Mexico as well as Central and South America, Europe and Asia.